Additional Burdens for Boards and Issuers Seeking No-Action Relief. New Requirements for Shareholder Proponents

Last week, on the cusp of the 2018 proxy season, the Division of Corporation Finance (the Division) issued Staff Legal Bulletin No. 141 (SLB 14I)* regarding certain aspects of Rule 14a-8 under the Securities Exchange Act of 1934 (the shareholder proposal rule).

SLB 14I provides guidance on the scope and application of the ordinary business exemption (Rule 14a-8(i)(7)) and the economic relevance exemption (Rule 14a-8(i)(5)) for issuers looking for no-action relief on a shareholder proposal. The bulletin also addresses shareholder proposals submitted by non-shareholder proponents on behalf of actual shareholders, and the use of graphs and images in shareholder proposals.

No-Action Letters – Additional Time and Processes
The most significant aspect of SLB 14I is that in some situations it may place additional burdens on issuers and, more importantly, boards of directors that seek no-action relief from the SEC on shareholder proposals under the ordinary business or economic relevance exemptions.
Specifically, boards may choose to provide additional detailed disclosure in no-action letters regarding the processes the board used to review and analyze shareholder proposals. This discussion would be to demonstrate to the Division that the board’s conclusions are “well-informed and well-reasoned”. The Division states that it believes “a well-developed discussion of the board’s analysis of these matters will greatly assist the staff with its review of no-action requests “
Depending on the shareholder proposal and the issuer’s unique circumstances, developing “well-informed and well-reasoned” conclusions and a “well-developed discussion” is likely to require additional time, in some cases significant, for boards to review shareholder proposals and detail the board’s processes. This additional time will need to be factored into the board’s schedule so that issuers can respond to a shareholder proposal within the timeframes imposed by rule 14a-8.

Shareholder Proponents – Proposal by Proxy
For shareholder proposal proponents that are submitting a shareholder proposal on behalf of a shareholder, which the Division refers to as “proposal by proxy”, SLB 14I may require additional disclosure from the proponent.
In SLB 14I, the Division notes that while it is of the view that “proposal by proxy” is allowed under 14a-8, it acknowledges “challenges and concerns” about whether the eligibility requirements of Rule 14a-8(b) have been met.
To address these concerns, the staff will look to the proponent to provide documentation describing the shareholder’s delegation of authority to the proxy. This would include identifying the shareholder proponent and the person or entity selected as proxy; the name of the company to which the proposal is directed; whether the proposal is submitted for an annual or special meeting; the specific proposal to be submitted; and that the submission is signed and dated by the shareholder.
Failure to provide this documentation could be grounds to exclude the shareholder proposal.

The Use of Images or Graphs
SLB 14I also provides guidance on the use of images in shareholder proposals. While the Division states that there is nothing in Rule 14a-8(d) that would prohibit the use of images and/or graphs, it recognizes the “potential for abuse in this area.”
However, it believes potential abuses can be addressed through other provisions of 14a-8. For example, under Rule 14a-8(i)(3), graphs or images would be excludable if they make the proposal materially false or misleading; directly or indirectly impugn character, integrity or personal reputation; are irrelevant to the subject matter of the proposal; or render the proposal vague or indefinite.
SLB 14I also notes that words used within the images do count toward the 500-word limit imposed by Rule 14a-8(d).

We will continue to monitor the impact of SLB 14I andwill update our clients as appropriate.
In the meantime, please contact yourMorrow Sodalirepresentative if you have any questions.

* A bulletin represents the views of the Division of Corporation Finance; it is not a rule, regulation or statement of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved its content.